JOHANNESBURG/MUMBAI Jan 23 (Reuters) - Drug company Cipla
Medpro is expected to demand more than the $215 million
on offer from Indian suitor Cipla Ltd to reflect a lucrative
government contract win that will increase its earnings power.

But the board of South Africa's No. 3 drug company should
tread carefully in raising the stakes in this takeover deal
because Cipla Ltd provides the bulk of the drugs it
sells.

Cipla Ltd is to offer 8.55 rand per share for a 51 percent
stake in Cipla Medpro. The Indian group supplies drugs to the
Cape Town-based company, but has never owned a stake.

"It would be prudent for Cipla Medpro's board to go back to
Cipla Ltd and try a get a better deal to reflect this contract
win," said one banker, not involved in the process.

The Johannesburg stock market is already betting on a
sweetened offer from the Indian firm, which has the second
largest share of India's $13 bln drug sector.

The Indian company's so-called "south-south" takeover bid
shows the attractions of South Africa's high-growth markets and
rising population for drug companies focused on low-priced
medicines that are off patent.

The deal would give Cipla Ltd more clout in South Africa,
where the government is introducing a national health insurance
plan heavily reliant on the use of generic drugs.

Cipla swooped in November when Cipla Medpro was under a
cloud after chief executive Jerome Smith quit following
allegations of awarding payouts without board approval.

Its shares were then about 7.7 rand each, putting Cipla's
offer at a premium of about 11 percent.

Analysts and industry rivals said Cipla Ltd's price was
"opportunistic" in the wake of the CEO scandal.

"Given the inherent prospects of the business, I don't think
Cipla Ltd would get 51 percent at this price, they are going to
have to offer more," said Anthony Clark, an analyst at Vunani
Securities.

Just days after Cipla's bid proposal, Cipla Medpro was
awarded a 1.4 billion rand ($159 million) share of a $667
million government two-year contract to supply of HIV/AIDS drugs
to public hospitals.

Analysts estimate Cipla Ltd stands to get revenues of $30-40
million annually from the contract if it gains control of Cipla
Medpro.

SUPPLY AGREEMENT

But some analysts said Cipla Medpro cannot afford to get too
tough over the bid price because the company relies so heavily
on the Indian firm's commitment to supply the bulk of its
medicines.

The supply deal was spearheaded by Smith, the former CEO and
founder of the company. There had been speculation Smith's
departure could affect Cipla Medpro's relationship with Cipla.

The success of the takeover would remove these doubts and
cement the relationship.

"Cipla Medpro is worth more with a 51 percent shareholding,
as it reduces the market's concerns regarding the sustainability
of the supply agreement," said Mathew Menezes, an analyst at
Avior Research in Johannesburg.

This is less than the company's enterprise value of around
4.4 billion rand, made up of its market capitalisation, debt and
certain other considerations, according to Reuters data. Net
debt was around 371 million rand as at end-June 2012, according
to a company statement.

"Cipla, being the supplier of drugs to Cipla Medpro, is the
key driver for the performance of the South African company.
Therefore, I think, they will seek a better offer from Cipla
rather than rejecting it," said Deepak Malik, analyst at
brokerage Emkay Global in Mumbai.

Cipla Ltd's director S. Radhakrishnan said no talks had
taken place around the price as it was still doing due
diligence. Cipla Medpro declined to comment.

Cipla Medpro is required to update the stock market every
six weeks about the takeover talks. The company gave an update
on Jan. 8 when it said talks were continuing without giving
details. The next update is expected around the last week of
February.